Bankers and regulators have called for mutual recognition among Asian rating agencies, to reduce reliance on their international counterparts – but are divided on the best way of achieving it.
Dato’ Lee Kok Kwan, deputy CEO (group treasury and investments) at CIMB bank of Malaysia, said the methodology used by international rating agencies “needs to be urgently addressed, as it does not seem to bear much semblance to the probability of default of Asean+3 nations.”
The methodology used to rate sovereigns is “quite subjective”, including judgments on democracy and media freedom “which have nothing to do with the probability of default of the sovereign”, Lee said.
Asian nations such as China and Thailand – which have high foreign exchange reserves, low foreign currency debt and high savings rates – had often been rated unfairly compared to developed nations like Spain, which are in far worse financial health.
The low rating then extends to corporate issuers, which are capped at the rating of their national sovereign, Lee pointed out. “That kills the premise of Asean+3 investing in the region, as reliance on international ratings is quite institutionalized,” he said.
Lee’s comments, which appear in a handbook on links between Asean+3 bond markets published today by Emerging Markets, reflect a growing movement to empower local rating agencies such as Tris in Thailand, Rating Agency Malaysia, Pefindo in Indonesia and PhilRatings in the Philippines.
While each has grown in stature, there is limited recognition of one another’s ratings, limiting cross-border transaction growth.
Amando Tetangco, Governor of Bangko Sentral ng Pilipinas, the Philippine central bank, said: “Asean countries have local rating agencies but it is not easy to compare.
“There is no conversion table to see ratings between domestic and foreign rating agencies. Methodologies may differ, rating definitions may differ – and benchmarks and the overall rating process may differ from one credit rating agency to another.
“If you are going to expand the market in the region, there [has] to be guidance for investors to look at,” he added.
Forums on capital market integration have floated the idea of a single credit rating agency covered by all regional markets. But some senior regulators find the idea unlikely.
Nurhaida, head of the Indonesian capital markets regulator Bapepam, said talk of a regional rating initiative was “something which I find amusing,” and argued that mutual recognition was not the answer either, instead calling for M&A among foreign and local rating agencies.
Khun Thirachai Phuvanatnaranubala, Secretary-General of Thailand’s Securities and Exchange Commission, called for mutual recognition among rating agencies – but doubted the merits of a single rating initiative. “I’m not sure how practical that is,” he said.
Ronald Andi Kasim, President Director of Pefindo, the Indonesian rating agency, said mutual recognition among the region’s agencies would be “very challenging and involve sensitive issues for most of us”.
But he thought a synchronized methodology – such as minimum criteria agencies should use when analyzing banks or pulp and paper companies – could be achieved.